Interpretation of final accounts - 5a Flashcards
What is profitability?
The ability of a firm to use its asset base in order to increase the total assets
What is solvency?
This refers to the ability of a firm to pay off its short term debt
What is efficiency?
This refers to the efficiency with which the firm manages its current assets and current liabilities.
What is investor suitability?
This refers to the attractiveness of the firms shares as an investment.
Return on capital employed formula
Net profit before tax and interest x100
/
All shareholders funds plus loans
Net profit margin formula
Net profit before tax x 100
/
Turnover
Gross profit margin formula
Gross profit before tax x 100
/
Turnover
The current ratio formula
Total Current Assets: Total Current Liabilities
Acid Test Ratio
Total Current Assets - inventory : Total Current Liabilities
What should the current ratio typically be?
at least 1.5 : 1
What should the acid test ratio typically be?
at least 1 : 1
Debt collection period formula
(receivables x 365)
/
annual credit sales
Creditor payment period formula
(trade payables x 365)
/
annual credit purchases
Rate of inventory turnover (stock turn) formula
Cost of sales
/
Average inventory holding during year
What other measures are increasingly being used in order to evaluate the performance of particular retail units?
- sales revenue per employee
- sales per footfall
- sales per meter of floor area
Capital gearing formula:
(Long-term debt x 100)
/
All finance
Earnings per share
Annual earnings (usually measured as profit after tax)
/
number of ordinary shares in issue.
Dividend per share formula
Ordinary Dividends (interim plus final)
/
Number of issued ordinary shares
Yield formula
Latest Ordinary dividend (interim plus final)
/
Current market price of share
Price/ Earnings ratio:
Latest market price of share
/
Latest Earnings per share
Why is ratio analysis undertaken?
- Simplify the information in the accounts
- Allow comparison of different sized firms
Limitations of ratio analysis:
- Ratios are only as reliable as the data from which they are drawn i.e: if the accounts are not true and fair, then neither are the ratios.
- Many factors cannot be measured by statistics e.g strategic vision, staff morale, ethical/environmental stance.
- The figures have limited meaning without “comparatives” e.g: industry average ratios, ratios of previous years.
- Ratios are only the tip-of-the-iceberg: need to refer to the accounts (and notes) for underlying reasons.
